World Bank sees stronger global growth on account of firming up of activity in high-income countries

The world economy is projected to strengthen this year, with growth in high-income economies appearing to be finally turning the corner five years after the global financial crisis, according to the World Bank’s newly-released Global Economic Prospects (GEP) report.

Here are some highlights from the data that have been released:

Global GDP growth is projected to firm from 2.4% in 2013 to 3.2% this year, stabilizing at 3.4% and 3.5% in 2015 and 2016, respectively, with much of the initial acceleration reflecting stronger growth in high-income economies, which is expected to accelerate from 1.3% in 2013 to 2.2% this year, and strengthening to 2.4% for 2015 and 2016.

Growth in developing countries will pick up from 4.8% in 2013 to 5.3% this year, and increasing steadily to 5.5% in 2015 and 5.7% in 2016.

Private capital inflows to developing countries remain sensitive to global financial conditions. As high-income monetary policy normalizes in response to stronger growth, global interest rates are projected to slowly rise. The impact of an orderly tightening of financial conditions on developing-country investment and growth is expected to be modest, with capital flows to developing countries projected to ease from about 4.6 percent of developing country GDP in 2013 to 4.1 percent in 2016.

Developing countries therefore face counterbalancing forces from high-income countries. The strengthening in high-income countries will boost demand for developing country exports, on the one hand, while rising interest rates will dampen capital flows, on the other. The report projects global trade to grow from an estimated 3.1 percent in 2013 to 4.6 percent this year and 5.1 percent in each of 2015 and 2016.

What does this mean for policy makers?
As a policy takeaway, policy makers need to give thought now to how they would respond to a significant tightening of global financing conditions. Countries with adequate policy buffers and investor confidence may be able to rely on market mechanisms, counter-cyclical macroeconomic and prudential policies to deal with a decline in capital flows. In other cases, where the scope for maneuvering is more limited, countries may be forced to tighten fiscal policy to reduce financing needs or raise interest rates to attract additional inflows.

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